The Trouble with GASB

In the world of public finance, a long-running debate over what’s included in state and local financial statements is reaching new heights.

In the world of public finance, a long-running debate over what’s included in state and local financial statements is reaching new heights. At issue is the Governmental Accounting Standards Board (GASB), which used to only issue standards based on real numbers but has evolved to issue standards on required or recommended reporting ranging from information on performance and results, to projecting out-year state and local fiscal health. With each new requirement has come a fight from those whose job it is to follow the new standards. Now, for the first time since it was established nearly 30 years ago, a proposal threatens to rein in GASB’s purview.

The latest kerfuffle involves the Financial Accounting Foundation (FAF) -- which oversees both GASB and its sister organization, the Financial Accounting Standards Board (FASB). FAF has proposed changes to GASB’s “agenda-setting process,” accountant-speak for the process by which GASB sets new rules and guidelines for governmental accounting. In late February, FAF trustees offered a proposal that essentially would give them the power to decide which initiatives GASB ought to be pursuing. It’s an unprecedented step, which some argue is necessary and others argue is a flat-out power grab to pre-empt proposed rules that are deemed by some in the public accounting world to be distasteful.

In the immediate term, the proposal would have the effect of derailing GASB’s proposed rules for “economic conditions and fiscal sustainability reporting,” which it has been developing for several years and which were released for comment last fall. The rules would institute a new reporting guideline that asks governments to project -- based upon current policy and knowledge -- five years of cash flow and financial obligations. Comments from stakeholders are due by April 30, and after that, trustees will make a final determination as to next steps. If FAF’s proposal takes hold, GASB’s proposed rules could only go forward if FAF determines that they're within GASB’s scope.

The proposal represents the first time FAF has purported to have jurisdiction over what GASB chooses to research and in what realms it can develop accounting standards. Why FAF has suddenly decided to assert itself in such a decision has some in the public finance world skeptical.

“They are entering into the standard-setting arena,” says Richard Tracy, a government performance consultant and the former and longtime auditor for Portland, Ore. “It’s a little surprising to me [that] in the proposal, it seems to me that one of their priorities is that GASB is free from undue influence. I think the proposal does the opposite: I think it responds to special interests.”

The foundation has said that its proposed oversight is not a direct result of any particular action by GASB, that it's based on a study commissioned nearly two years ago (in May 2011) that sought to examine whether GASB’s reporting standards and guidelines properly assess government financial accountability. That study concluded that there was a lack of consensus about GASB’s authority and scope.

“The FAF trustees believe modifying GASB’s agenda-setting process to allow early stakeholder input is the best way to address scope of authority issues,” John Pappas, a spokesman for FAF, said in an email to Governing. “For example, assessing a project to be ‘in scope’ early in the agenda-setting process would allow appropriate trustee oversight while preserving the GASB’s standard-setting independence.”

But others don’t see FAF’s proposal as a move to carefully guide and protect its child. Instead, they see it as an effort to block what simply might be unpopular reporting proposals being floated by GASB.

“[FAF’s] own proposal says there’s no bright line for demarcating the limits for authority,” notes Amanda Noble, a member of the Governmental Accounting Standards Advisory Council. “So it’s still going to require judgment, but it’s the trustees’ judgment rather than the GASB’s judgment.”

And there are certainly parties (the special interests to which Tracy is referring) keen on reining in the standards board’s scope -- and have been for quite some time. In recent weeks, representatives from the "Big Seven" -- the Government Finance Officers Association (GFOA); National Association of State Budget Officers (NASBO); National Association of State Auditors, Comptrollers and Treasurers (NASACT); International City/County Management Association (ICMA); National Association of Counties (NACo); National League of Cities (NLC) and the U.S. Conference of Mayors (USCM) -- have all written testy letters to GASB detailing their objections to the proposed economic conditions reporting.

The letter to GASB’s director of research and technical activities from GFOA, ISMA, NACo, NLC and USCM calls the proposed five-year financial forecasting mandate unnecessary and confusing.

Government budgets already “reflect a government’s best estimates taking into account likely future developments and the government’s anticipated response to those developments,” the Mar. 16 letter says. Meanwhile the GASB proposal “would impose an essentially mechanical projection of future developments based solely on past trends and known future events. Citizens and other interested parties would more likely be confused than enlightened by the disparity between the two sets of projections.”

The letter adds that “the proposed mandate is also beyond the legitimate scope of the board’s jurisdiction.”

In its letter, NASACT echoes the sentiment, adding the additional requirement would become a cost burden to governments. NASBO’s letter notes the required projections would be based upon “too many built in assumptions,” potentially rendering them “questionable and potentially misleading.”

GASB has said its proposal seeks to create a uniform way to show fiscal projections in governments, and the board’s project researchers believe that government-wide information would give users more comprehensive trends in revenues, expenses, financial position and outstanding debt. The board referred questions regarding the FAF proposal to the foundation.

The GFOA and members of the “Big Seven” state and local associations group (which also includes the Council of State Governments) have a history of teaming up against GASB. The last major dustup was in 2007 when they lobbied hard against new rules GASB proposed regarding performance measurement reporting on financial statements (known in public finance circles as “service efforts and accomplishments reporting”).

In a 2009 Journal of Financial Management article outlining GASB’s increasingly tumultuous role in government accountability in accounting, authors Sam M. McCall and William Earle Klay note that GFOA and the Big Seven believe GASB’s efforts to promote performance reporting betrays a misguided idea of its powers.

“They argue GASB has an ‘ill-defined’ concept of accountability,” the article says, “one that is outside the scope of GASB’s authority, and that performance reporting should be restricted to the budget process, where neither GASB nor any other organization has authority to establish reporting standards.”

In fact, GFOA in 2007 went so far as to try and abolish GASB and transfer the board’s responsibilities to FASB.

Established in 1984 to replace the National Council of Governmental Accounting, GASB lived a rather mundane existence issuing statements on things like how to report food stamps as revenue or clarifying current practices. But in 1999, it stirred the pot with Statement 34 and called for accrual accounting, which required an inventory of fixed assets and the costs of taking care them. The statement went into effect for all governments in 2003.

Then in 2004, GASB issued Statement 45 which required governments to account for the liabilities of other post-employment benefits (OPEB) just as they do for pensions (the cost of retiree health care being the most significant contributor to OPEB liabilities). That again riled up state and local governments to the point where the state of Texas threatened not to comply, passing legislation in 2007 that said it didn’t have to adhere to the standard. (However Texas and most of its localities -- with the exception of Travis County which initiated the 2007 legislation -- follow Statement 45 to avoid an adverse GAAP opinion from auditors.)

After that came the performance reporting requirements and now the proposed economic conditions reporting. Clearly, to some organizations, GASB in the last decade or so has been pushing the boundaries of its purview. But from an oversight perspective, is FAF flexing its muscle to the point where now it’s the one overstepping its bounds?

“I think there is a group of unhappy constituents that is [unduly] influencing FAF trustees,” Tracy says. “And that’s unfortunate because it does color GASB’s ability to do its job.